Assumptions and Risk Assessment

1. Assumptions

As you have seen in previous stages, at every step in each stage, I have asked you to review this section and document all the assumptions you are making. Risks are the main outcome of assumptions which are not recognized or mitigated. It is important to have an honest discussion about the assumptions you are making for your business through the three stages – understanding the problem, devising the solution and crafting the business. These assumptions should be called out as early as possible and documented in the template mentioned here. It is a live document that should be continuously monitored and discussed regularly.

As you fill out these assumptions, mention the area of the business case it pertains to and the potential impact if that assumption was proven false. And finally, document the steps you should be taking to validate those assumptions.

Areas of assumptions include all aspects of the business model:
– Customer motivations, needs and future behavior expectations
– Value Proposition
– Value Delivery
– Value Creation
– Value Partnership
– Value capturing, including pricing and licensing model
– Value funding, including cost projections
– Experience Implications.
– Resources, Process and Technology dependencies
If during validation you find out that the assumption did not hold ground, then it is necessary to have a critical discussion among the stakeholders to figure out the next steps. It is important to know that at times it is okay if your assumptions do not hold ground. But when that happens, you need to move forward nonetheless. However, this should be a rare event, and the team should agree that they are ready to overcome this obstacle.

1.1. Impact

If an assumption is proven false through research, negative consequences on
the business would result.
◾ Impact is Minor if the consequence is minimal.
◾ Impact is Major if the consequence is drastic but recoverable.
◾ Impact is Critical if the consequence is catastrophic (Figure Bewow). These assumptions should be looked at from the lens of an hourglass, where the top half will be filled with these minor, major and critical assumptions at the beginning of the venture. However, as your team goes
through the first three stages, these assumptions will be validated, and the bottom half will continue to fill up (Figure 6.2). You have to note that as you move forward in your venture, the top half will continually be filled with newer assumptions, so do not consider that your initial set of assumptions are all the assumptions you need to worry
about.

1.2. Assumptions Template

Its best to create this assumptions map as a shared spreadsheet, such as Google Sheets, which is constantly updated and monitored regularly.
Status
Set the statuses as follows:
◾ When a new assumption is created, the status will be New.
◾ Members can change the status to In Progress when they are working on an assumption.
◾ When the assumption is proven true, they would change the status to Validated.
◾ When the assumption is proven false, they would change the status to Disproved.

2. Risk Assessment

Every venture has inherent risk. And it is a losing battle to try to eliminate the risk altogether. The best that could be done is to have a clear understanding of the risks, their severity or impact on the business and find out ways to mitigate those risks.

So the question is how to have a clear understanding of the risk. Risk in any business is driven from the assumptions that have been implicitly or explicitly built into various aspects of the business. These assumptions, if proven wrong, have adverse consequences on the business. Having an open and honest assessment of these assumptions will help
you to have a clear idea of the risks associated with your business. As we have seen throughout the earlier steps, you have been asked to document all those risks and identify their impact on the business. Now you’ll see a simple approach to converting those assumptions into a quantified risk.

Aggregate the number of assumptions which have minor impact on the business. You’ll have the accumulated value or “Minor Risk Impact Value.” Aggregate the number of assumptions which have major impact on the business and multiply that number by 5. You’ll have the accumulated value of “Major Risk Impact Value.”

Aggregate the number of assumptions which have critical impact on the business and multiply that number by 25. You’ll have the accumulated value of “Critical Risk Impact Value.” Now add the three Impact Values together to find the Risk Score.

Risk Score = Minor Risk Impact Value + Major Risk Impact Value + Critical Risk Impact Value

The maximum Risk Score should be 100. At the beginning of the business, the Risk Score is expected to be greater than 100, as there are many assumptions in each stage of the business. The whole idea is that the team should be aware of all the assumptions, and therefore the risks, so that additional effort could be made to mitigate those risks as the idea moves forward. This Risk Score can be shown on a Risk scale as follows so that the team has a clear idea of what needs to be done

You may also break down the risks for each stage to have a clear idea of the risk category. It is imperative to focus on mitigating the critical assumptions first, as those have the most adverse impact on the business. This should be followed by addressing Major risks, which should be followed by taking care of Minor risks.